Travel Log – Balticum

Late November I missed my appointment in the Baltics but I stated back then that one day I would visit this Nordic hub. And thanks to VOKA Antwerp Chamber I achieved so last week. What did we learn ?

First stop Tallinn and a kind of shock occurred in many ways. Not only a very resilient country in the post 2008 era, but also a very specific attitude of people towards people and business. Estonians combine Nordic cool style – “get to the point please” – with a very progressive attitude on various aspects of life. The best example is the digital society and e-government/internet applications used. Even the administration is completely equipped with e-applications improving the efficiency in a number of fields, including a very simple and transparent direct/indirect tax system.

1) photo on top : e-cabinet, ministers’ meeting completely paperless, all prepared in advance on laptop. Result : weekly cabinet meetings now take on average 30 to 90 minutes, 4 to 5 hours a decade ago. Estonia hosts about 1,3 mio people for which it has secured 300 civil servants working at the finance ministry. To compare : In Belgium we have a similar department with 30,000 civil servants servicing 10 mio people.

All in all a very business friendly environment and lots of individual entrepreneurs and small/medium sized companies. Small is beautiful but it has some disadvantages for international investors when it comes to financial markets (same holds for Latvia). The thing is that market cap and liquidity – albeit for stock markets or bonds – is still very poor. And in both countries, various bankers and business people confirmed to me that this is not likely to improve in the near future. Why ?

Both Estonia and Latvia experienced a severe shock in 2008/09 with Latvia taking the biggest hit following an immense credit bubble. Anecdote : In Europe prior to 2008, the largest distribution center of luxury car makers Ferrari and Aston Martin was located in Riga. After severe fiscal austerity and reforms, growth has resumed financed by….banks. Briefly, the credit crisis is no longer a sword of Damocles hanging over the Baltics, mainly because of the vast presence of Scandinavian banks providing ample credit and having been the necessary lifeline for the economy in 2008/09. Today, Swedbank, SEB, DNB, Nordea and Danske occupy more than 90% of the Baltic market. In Estonia, virtually every private sector initiative (dwellings or business) is financed by bank credit lines at relatively low funding cost. In Latvia, which will switch to the EUR on 01/01/14, more or less the same applies. That’s good news for the economy but for me as a bond investors not so good. Virtually no corporate bonds existing in Estonia/Latvia while the former has a 9% public debt/GDP ratio, the latter 41%. So even government bonds are a rather scarce good.

A final note on Estonia and energy. Estonia’s oil shale deposits account for 17% of total deposits iin the EU with the country virtually generating all its power through this source. Modern utilization of shale oil started in 1916 with electricity generation kicking off in 1924. Estonia currently operates 6 mines and exports electricity, ie to Russia. Of course the environmental issues are not entirely resolved and it seems a lot of efforts are still required …